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Is Your Holding Period Hurting You?

Here are a few reasons to hang on to the good things you've got.

I recently noted that investors' holding periods seem to be shortening. This isn't, generally, a good thing.

I then heard from some readers, who offered ideas on the causes of the shorter holding periods. Here's what one reader had to say: "It occurred to me that media hype and the influence of manic-depressives like [a certain television personality], who constantly exhorts trading for one-week holding periods, may have an impact. Hard to tell if that is a reflection of a growing mentality or an influence on it."

This is a good point. This hyper trader on TV is not alone in throwing out idea after idea to investors. No wonder we may feel an urge to sell this so that we can buy that. And that. And that, too. The solution, though, is to just resist. If a certain stock is a compelling buy at its current price, you should probably aim to hang on for quite a while, until its intrinsic value is reached or surpassed.

Another reader pointed out that, "While it is true that trading has its costs, trading within retirement funds has no immediate tax consequences for the trader. I would bet that many trade within their retirement accounts."

This is another excellent point. It's indeed true that you don't get whacked with short-term capital gains tax rates when engaging in frequent trading in an IRA. (Short-term rates are equal to ordinary income tax rates, which can top 30%.) This factor, along with the growing use of IRAs and other tax-preferred retirement accounts, might explain a lot of our shorter holding periods.

The bottom line for me, though, is that in general, short-term trading just isn't as effective as long-term investing -- at least for most of us. That's because no one can really know where the market, or any given stock, is headed from day to day -- though we can often be relatively sure that they'll appreciate over the years ahead. Holding stocks for days or hours, or even months, is really more like gambling than investing. It's speculating.

Great minds on patienceSuper-investor Warren Buffett would concur, I think. After all, he's said that he wouldn't mind if the stock market were open only one day a year, instead of some 250 days.

By concentrating on the long-term, our patient approach allows us to take advantage of buying opportunities that frequently arise from Wall Street's excessive focus on the short-term. Just like the fabled tortoise, the symbol of our firm, we value patience and persistence over the fleeting and the flashing. We are also contrarians. We operate under the premise that financial success is achieved not by chasing the crowd, but seeing what others have missed.

Mr. Sauer walks the walk, with just a 25% turnover rate in the fund. Many of the stocks he owns have doubled or even tripled in value since his purchase, including MBIA (NYSE:MBI), T. Rowe Price (NASDAQ:TROW), Baxter (NYSE:BAX), Dun & Bradstreet (NYSE:DNB), and Yum! Brands (NYSE:YUM). Yet he doesn't automatically sell those stocks to lock in a profit.

A smaller mind on patienceAnother consideration to keep in mind is that you may, if you're lucky, make a nice little profit -- say, 50% -- on a stock within a few months or a year. But if the stock is a strong performer with great long-term prospects, smart management, and a defensible competitive advantage, you might do well to just hang on for years, despite ups and downs. Many great fortunes have been made that way -- by taking less action instead of more.

Look at our Motley Fool Stock Advisor newsletter, for example. (You can try it for free for 30 days, with full access to past issues, letting you read about every recommendation.) One stock the newsletter recommended nearly five years ago is up more than 700%. Had this stock been sold after a 100% or 200% rise, a lot of money would have been left on the table. Three other recommendations from 2002 are up considerably since being given the nod: 200%, 300%, and 400%.

So don't just blindly hang on to every stock you own. Keep up with them all to make sure they're still healthy and growing. But as long as they are, consider giving them lots of room to run.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian